(B)interest on amounts set aside in a reserve fund under chapter 533 or 535 of title
46, United States Code,

(C)active business computer software royalties (within the meaning of subsection (d)), and

(D)interest received by a broker or dealer (within the meaning of section 3(a)(4) or (5) of the Securities and Exchange Act of 1934) in connection with—

(i)any securities or money market instruments held as property described in section
1221(a)(1),

(ii)margin accounts, or

(iii)any financing for a customer secured by securities or money market instruments.

(2) Rents

The adjusted income from rents; except that such adjusted income shall not be included if—

(A)such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income, and

(B)the sum of—

(i)the dividends paid during the taxable year (determined under section
562),

(ii)the dividends considered as paid on the last day of the taxable year under section
563(d)[1] (as limited by the second sentence of section
563(b)), and

(iii)the consent dividends for the taxable year (determined under section
565),

equals or exceeds the amount, if any, by which the personal holding company income for the taxable year (computed without regard to this paragraph and paragraph (6), and computed by including as personal holding company income copyright royalties and the adjusted income from mineral, oil, and gas royalties) exceeds 10 percent of the ordinary gross income.

(3) Mineral, oil, and gas royalties

The adjusted income from mineral, oil, and gas royalties; except that such adjusted income shall not be included if—

(A)such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income,

(B)the personal holding company income for the taxable year (computed without regard to this paragraph, and computed by including as personal holding company income copyright royalties and the adjusted income from rents) is not more than 10 percent of the ordinary gross income, and

(C)the sum of the deductions which are allowable under section
162 (relating to trade or business expenses) other than—

(i)deductions for compensation for personal services rendered by the shareholders, and

(ii)deductions which are specifically allowable under sections other than section
162,

equals or exceeds 15 percent of the adjusted ordinary gross income.

(4) Copyright royalties

Copyright royalties; except that copyright royalties shall not be included if—

(A)such royalties (exclusive of royalties received for the use of, or right to use, copyrights or interests in copyrights on works created in whole, or in part, by any shareholder) constitute 50 percent or more of the ordinary gross income,

(B)the personal holding company income for the taxable year computed—

(i)without regard to copyright royalties, other than royalties received for the use of, or right to use, copyrights or interests in copyrights in works created in whole, or in part, by any shareholder owning more than 10 percent of the total outstanding capital stock of the corporation,

(ii)without regard to dividends from any corporation in which the taxpayer owns at least 50 percent of all classes of stock entitled to vote and at least 50 percent of the total value of all classes of stock and which corporation meets the requirements of this subparagraph and subparagraphs (A) and (C), and

(iii)by including as personal holding company income the adjusted income from rents and the adjusted income from mineral, oil, and gas royalties,

is not more than 10 percent of the ordinary gross income, and

(C)the sum of the deductions which are properly allocable to such royalties and which are allowable under section
162, other than—

(i)deductions for compensation for personal services rendered by the shareholders,

(ii)deductions for royalties paid or accrued, and

(iii)deductions which are specifically allowable under sections other than section
162,

equals or exceeds 25 percent of the amount by which the ordinary gross income exceeds the sum of the royalties paid or accrued and the amounts allowable as deductions under section
167 (relating to depreciation) with respect to copyright royalties.

For purposes of this subsection, the term “copyright royalties” means compensation, however designated, for the use of, or the right to use, copyrights in works protected by copyright issued under title 17 of the United States Code and to which copyright protection is also extended by the laws of any country other than the United States of America by virtue of any international treaty, convention, or agreement, or interests in any such copyrighted works, and includes payments from any person for performing rights in any such copyrighted work and payments (other than produced film rents as defined in paragraph (5)(B)) received for the use of, or right to use, films. For purposes of this paragraph, the term “shareholder” shall include any person who owns stock within the meaning of section
544. This paragraph shall not apply to active business computer software royalties.

(5) Produced film rents

(A)Produced film rents; except that such rents shall not be included if such rents constitute 50 percent or more of the ordinary gross income.

(B)For purposes of this section, the term “produced film rents” means payments received with respect to an interest in a film for the use of, or right to use, such film, but only to the extent that such interest was acquired before substantial completion of production of such film. In the case of a producer who actively participates in the production of the film, such term includes an interest in the proceeds or profits from the film, but only to the extent such interest is attributable to such active participation.

(6) Use of corporate property by shareholder

(A)Amounts received as compensation (however designated and from whomever received) for the use of, or the right to use, tangible property of the corporation in any case where, at any time during the taxable year, 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property (whether such right is obtained directly from the corporation or by means of a sublease or other arrangement).

(B)Subparagraph (A) shall apply only to a corporation which has personal holding company income in excess of 10 percent of its ordinary gross income.

(C)For purposes of the limitation in subparagraph (B), personal holding company income shall be computed—

(i)without regard to subparagraph (A) or paragraph (2),

(ii)by excluding amounts received as compensation for the use of (or right to use) intangible property (other than mineral, oil, or gas royalties or copyright royalties) if a substantial part of the tangible property used in connection with such intangible property is owned by the corporation and all such tangible and intangible property is used in the active conduct of a trade or business by an individual or individuals described in subparagraph (A), and

(iii)by including copyright royalties and adjusted income from mineral, oil, and gas royalties.

(7) Personal service contracts

(A)Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and

(B)amounts received from the sale or other disposition of such a contract.

This paragraph shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services.

(8) Estates and trusts

Amounts includible in computing the taxable income of the corporation under part I of subchapter J (sec.
641 and following, relating to estates, trusts, and beneficiaries).

(b) Definitions

For purposes of this part—

(1) Ordinary gross income

The term “ordinary gross income” means the gross income determined by excluding—

(A)all gains from the sale or other disposition of capital assets, and

(B)all gains (other than those referred to in subparagraph (A)) from the sale or other disposition of property described in section
1231(b).

(2) Adjusted ordinary gross income

The term “adjusted ordinary gross income” means the ordinary gross income adjusted as follows:

(A) Rents

From the gross income from rents (as defined in the second sentence of paragraph (3) of this subsection) subtract the amount allowable as deductions for—

(i)exhaustion, wear and tear, obsolescence, and amortization of property other than tangible personal property which is not customarily retained by any one lessee for more than three years,

(ii)property taxes,

(iii)interest, and

(iv)rent,

to the extent allocable, under regulations prescribed by the Secretary, to such gross income from rents. The amount subtracted under this subparagraph shall not exceed such gross income from rents.

(B) Mineral royalties, etc.

From the gross income from mineral, oil, and gas royalties described in paragraph (4), and from the gross income from working interests in an oil or gas well, subtract the amount allowable as deductions for—

to the extent allocable, under regulations prescribed by the Secretary, to such gross income from royalties or such gross income from working interests in oil or gas wells. The amount subtracted under this subparagraph with respect to royalties shall not exceed the gross income from such royalties, and the amount subtracted under this subparagraph with respect to working interests shall not exceed the gross income from such working interests.

(C) Interest

There shall be excluded—

(i)interest received on a direct obligation of the United States held for sale to customers in the ordinary course of trade or business by a regular dealer who is making a primary market in such obligations, and

(ii)interest on a condemnation award, a judgment, and a tax refund.

(D) Certain excluded rents

From the gross income consisting of compensation described in subparagraph (D) of paragraph (3) subtract the amount allowable as deductions for the items described in clauses (i), (ii), (iii), and (iv) of subparagraph (A) to the extent allocable, under regulations prescribed by the Secretary, to such gross income. The amount subtracted under this subparagraph shall not exceed such gross income.

(3) Adjusted income from rents

The term “adjusted income from rents” means the gross income from rents, reduced by the amount subtracted under paragraph (2)(A) of this subsection. For purposes of the preceding sentence, the term “rents” means compensation, however designated, for the use of, or right to use, property, and the interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation; but such term does not include—

(A)amounts constituting personal holding company income under subsection (a)(6),

(B)copyright royalties (as defined in subsection (a)(4)),

(C)produced film rents (as defined in subsection (a)(5)(B)),

(D)compensation, however designated, for the use of, or the right to use, any tangible personal property manufactured or produced by the taxpayer, if during the taxable year the taxpayer is engaged in substantial manufacturing or production of tangible personal property of the same type, or

The term “adjusted income from mineral, oil, and gas royalties” means the gross income from mineral, oil, and gas royalties (including production payments and overriding royalties), reduced by the amount subtracted under paragraph (2)(B) of this subsection in respect of such royalties.

(c) Gross income of insurance companies other than life insurance companies

In the case of an insurance company other than a life insurance company, the term “gross income” as used in this part means the gross income, as defined in section
832(b)(1), increased by the amount of losses incurred, as defined in section
832(b)(5), and the amount of expenses incurred, as defined in section
832(b)(6), and decreased by the amount deductible under section
832(c)(7) (relating to tax-free interest).

(d) Active business computer software royalties

(1) In general

For purposes of this section, the term “active business computer software royalties” means any royalties—

(A)received by any corporation during the taxable year in connection with the licensing of computer software, and

(B)with respect to which the requirements of paragraphs (2), (3), (4), and (5) are met.

(2) Royalties must be received by corporation actively engaged in computer software business

The requirements of this paragraph are met if the royalties described in paragraph (1)—

(A)are received by a corporation engaged in the active conduct of the trade or business of developing, manufacturing, or producing computer software, and

(B)are attributable to computer software which—

(i)is developed, manufactured, or produced by such corporation (or its predecessor) in connection with the trade or business described in subparagraph (A), or

(ii)is directly related to such trade or business.

(3) Royalties must constitute at least 50 percent of income

The requirements of this paragraph are met if the royalties described in paragraph (1) constitute at least 50 percent of the ordinary gross income of the corporation for the taxable year.

(4) Deductions under sections
162 and
174 relating to royalties must equal or exceed 25 percent of ordinary gross income

(A) In general

The requirements of this paragraph are met if—

(i)the sum of the deductions allowable to the corporation under sections
162,
174, and
195 for the taxable year which are properly allocable to the trade or business described in paragraph (2) equals or exceeds 25 percent of the ordinary gross income of such corporation for such taxable year, or

(ii)the average of such deductions for the 5-taxable year period ending with such taxable year equals or exceeds 25 percent of the average ordinary gross income of such corporation for such period.

If a corporation has not been in existence during the 5-taxable year period described in clause (ii), then the period of existence of such corporation shall be substituted for such 5-taxable year period.

(B) Deductions allowable under section
162

For purposes of subparagraph (A), a deduction shall not be treated as allowable under section
162 if it is specifically allowable under another section.

(C) Limitation on allowable deductions

For purposes of subparagraph (A), no deduction shall be taken into account with respect to compensation for personal services rendered by the 5 individual shareholders holding the largest percentage (by value) of the outstanding stock of the corporation. For purposes of the preceding sentence—

(i)individuals holding less than 5 percent (by value) of the stock of such corporation shall not be taken into account, and

(ii)stock deemed to be owned by a shareholder solely by attribution from a partner under section
544(a)(2) shall be disregarded.

(5) Dividends must equal or exceed excess of personal holding company income over 10 percent of ordinary gross income

(A) In general

The requirements of this paragraph are met if the sum of—

(i)the dividends paid during the taxable year (determined under section
562),

(ii)the dividends considered as paid on the last day of the taxable year under section
563(d)[1] (as limited by the second sentence of section
563(b)), and

(iii)the consent dividends for the taxable year (determined under section
565),

equals or exceeds the amount, if any, by which the personal holding company income for the taxable year exceeds 10 percent of the ordinary gross income of such corporation for such taxable year.

(B) Computation of personal holding company income

For purposes of this paragraph, personal holding company income shall be computed—

(i)without regard to amounts described in subsection (a)(1)(C),

(ii)without regard to interest income during any taxable year—

(I)which is in the 5-taxable year period beginning with the later of the 1st taxable year of the corporation or the 1st taxable year in which the corporation conducted the trade or business described in paragraph (2)(A), and

(II)during which the corporation meets the requirements of paragraphs (2), (3), and (4), and

(iii)by including adjusted income from rents and adjusted income from mineral, oil, and gas royalties (within the meaning of paragraphs (2) and (3) of subsection (a)).

(6) Special rules for affiliated group members

(A) In general

In any case in which—

(i)the taxpayer receives royalties in connection with the licensing of computer software, and

(ii)another corporation which is a member of the same affiliated group as the taxpayer meets the requirements of paragraphs (2), (3), (4), and (5) with respect to such computer software,

the taxpayer shall be treated as having met such requirements.

(B) Affiliated group

For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section
1504(a).

2006—Subsec. (a)(1)(B). Pub. L. 109–304substituted “chapter 533 or 535 of title
46, United States Code” for “section 511 or 607 of the Merchant Marine Act, 1936 (46 App. U.S.C. 1161 or 1177)”.

2004—Subsec. (b)(1). Pub. L. 108–357inserted “and” at end of subpar. (A), substituted a period for “, and” at end of subpar. (B), and struck out subpar. (C) which read as follows: “in the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year is owned by nonresident alien individuals (whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), all items of income which would, but for this subparagraph, constitute personal holding company income under any paragraph of subsection (a) other than paragraph (7) thereof:”.

Subsec. (c). Pub. L. 100–647, § 1010(f)(5), substituted “other than life insurance companies” for “other than life or mutual” in heading and “other than a life insurance company” for “other than life or mutual” in text.

Subsec. (a)(4). Pub. L. 94–553struck out “(other than by reason of section
2 or
6 thereof)” after “title 17 of the United States Code”.

Subsec. (a)(5)(B). Pub. L. 94–455, § 211(a), inserted “In the case of a producer who actually participates in the production of the film, such term includes an interest in the proceeds or profits from the film, but only to the extent such interest is attributable to such active participation”.

1966—Subsec. (a)(2). Pub. L. 89–809, § 206(b)(1), struck out provision that royalties received for the use of, or for the privilege of using, a patent, invention, model, or design, secret formula, process, or other similar property right be treated as rent if such property right is also used by the corporation receiving such royalties in the manufacture or production of tangible personal property held for lease to customers and if the amount constituting rent from such leases to customers meets the requirement of subparagraph (A).

1964—Subsec. (a). Pub. L. 88–272, § 225(d), amended subsec. (a) generally, and among other changes, substituted “adjusted ordinary gross income” for “gross income”, provided, relative to rental income, that in addition to the 50-percent test of par. (2)(A), now applied on the basis of adjusted income from rents and adjusted ordinary gross income, a second test for exclusion shall be whether the sum on the dividends paid during the taxable year, the dividends paid on the last day of the year, and the consent dividends for the taxable year, equals or exceeds the amount by which the personal holding company income for the year exceeds 10 percent of the ordinary gross income, relative to mineral, oil, and gas royalties, that in addition to the 50-percent test of par. (3)(A), now applied on the basis of adjusted ordinary gross income, and the 15-percent test of par. (3)(C), from which test have been excluded deductions “specifically allowable under sections other than section
162” and is also now applied on the basis of adjusted gross income, the royalties shall be excluded if the personal holding company income for the taxable year is not more than 10 percent of the ordinary gross income, relative to copyright royalties, retained the 50-percent test as in par. (4)(A), making it applicable to ordinary gross income, included in the computation of the income for the taxable year the adjusted income from rents and the adjusted income from mineral, oil, and gas royalties, excluded from the sum of deductions allocable to royalties, deductions specifically allowable under sections other than 162, and changed the requirement that deductions constitute 50 percent or more of gross income to provide that they must equal 25 percent of ordinary gross income reduced by royalties paid and by depreciation deductions with respect to copyrights, relative to produced film rents, that they be treated on their own basis and not as rentals, and defined “produced film rents”, relative to use of corporation property by shareholders, that personal holding company income includes copyright royalties and the adjusted income from mineral, oil, and gas royalties, eliminated gains from the sale or other disposition of any interest in an estate or trust, from the sale or exchange of stock or securities, and from futures transactions in any commodity, and also definition of “rents”. See subsec. (b)(3).

Subsec. (a)(2). Pub. L. 88–484inserted sentence requiring royalties received for the use of, or for the privilege of using, a patent, invention, model, or design (whether or not patented), secret formula or process, or any other similar property right to be treated as rent, if such property right is also used by the corporation receiving such royalties in the manufacture or production of tangible personal property held for lease to customers, and if the amount (computed without regard to this sentence) constituting rent from such leases to customers meets the requirements of subparagraph (A).

Subsec. (b). Pub. L. 88–272, § 225(d), added subsec. (b). Former subsec. (b), which provided that gross income and personal holding company income determined with respect to transactions relating to gains from stock and security transactions, and with respect to transactions relating to gains from commodity transactions, should include only the excess of gains over losses from such transactions, was struck out.

Subsec. (d). Pub. L. 88–272, § 225(k)(2), struck out subsec. (d) which related to special adjustment on disposition of antitrust stock received as a dividend.

1962—Subsec. (a)(1). Pub. L. 87–403prescribed conditions making inapplicable the provisions of the paragraph to dividend distribution of divested stock.

Amendment by Pub. L. 108–357applicable to taxable years of foreign corporations beginning after Dec. 31, 2004, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end, see section 413(d)(1) ofPub. L. 108–357, set out as an Effective and Termination Dates of 2004 Amendments note under section
1 of this title.

Effective Date of 1999 Amendment

Amendment by Pub. L. 106–170applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) ofPub. L. 106–170, set out as a note under section
170 of this title.

Effective Date of 1988 Amendment

Amendment by section 1010(f)(5) ofPub. L. 100–647effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) ofPub. L. 100–647, set out as a note under section
1 of this title.

Pub. L. 100–647, title VI, § 6279(b),Nov. 10, 1988, 102 Stat. 3754, provided that: “The amendments made by this section [amending this section] shall apply to interest received after the date of the enactment of this Act [Nov. 10, 1988], in taxable years ending after such date.”

Amendment by Pub. L. 98–369effective as if included in the provision of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97–248, to which such amendment relates, see section 715 ofPub. L. 98–369, set out as a note under section
31 of this title.

Effective Date of 1982 Amendment

Amendment by Pub. L. 97–248applicable to distributions after Aug. 31, 1982, with exceptions for certain partial liquidations, see section 222(f) ofPub. L. 97–248, set out as a note under section
302 of this title.

Amendment by section 1901(b)(32)(D) ofPub. L. 94–455applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) ofPub. L. 94–455, set out as a note under section
2 of this title.

Amendment by section 104(h)(2) ofPub. L. 89–809applicable with respect to taxable years beginning after Dec. 31, 1966, see section 104(n) ofPub. L. 89–809, set out as a note under section
11 of this title.

Pub. L. 89–809, title II, § 206(c),Nov. 13, 1966, 80 Stat. 1579, provided that: “The amendments made by subsections (a) and (b) [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Nov. 13, 1966]. Such amendments shall also apply, at the election of the taxpayer (made at such time and in such manner as the Secretary or his delegate may prescribe), to taxable years beginning on or before such date and ending after December 31, 1965.”

Amendment by Pub. L. 88–272applicable to taxable years beginning after Dec. 31, 1963, see section 225(l) ofPub. L. 88–272, set out as a note under section
316 of this title.

Effective Date of 1962 Amendment

Amendment by Pub. L. 87–403applicable only with respect to distributions made after Feb. 2, 1962, see section 3(g) ofPub. L. 87–403, set out as a note under section
312 of this title.

Effective Date of 1960 Amendment

Pub. L. 86–435, § 2,Apr. 22, 1960, 74 Stat. 78, provided that: “The amendments made by the first section of this Act [amending this section and sections
544 and
553 of this title] shall apply only with respect to taxable years beginning after December 31, 1959.”

“(a) General Rule.—For purposes of subtitle A of the 1986 Code, the term ‘personal holding company income’ shall not include any dividend received by a qualified bank holding company from a 25-percent owned bank during any taxable year ending in 1989 or 1990.

“(b) $3,000,000 Limitation.—The aggregate amount excluded from the personal holding company income of any qualified bank holding company under subsection (a) for the taxable year shall not exceed $3,000,000.

“(c) Qualified Bank Holding Company.—For purposes of this section, the term ‘qualified bank holding company’ means any bank holding company (as defined in section 2(a) of the Bank Holding Company Act of 1956 [12 U.S.C. 1841(a)]) if 80 percent or more (by value) of the assets of such company at all times during the taxable year consist of stock in 1 or more 25-percent owned banks.

“(d) 25-Percent Owned Bank.—For purposes of this section, the term ‘25-percent owned bank’ means any bank (as defined in section 581 of the 1986 Code) if at least 25 percent of the stock of such bank (by vote and value) is owned by the bank holding company.”

Special Rules for Broker-Dealers, Royalties Received by Qualified Taxpayer, and Treatment of Active Business Computer Royalties for S Corporation Purposes

“(b) Special Rules for Broker-Dealers.—In the case of a broker-dealer which is part of an affiliated group which files a consolidated Federal income tax return, the common parent of which was incorporated in Nevada on January 27, 1972, the personal holding company income (within the meaning of section 543 of the Internal Revenue Code of 1986) of such broker-dealer, shall not include any interest received after the date of the enactment of this Act [Oct. 22, 1986] with respect to—

“(1) any securities or money market instruments held as inventory,

“(2) margin accounts, or

“(3) any financing for a customer secured by securities or money market instruments.

“(c) Special Rule for Royalties Received by Qualified Taxpayer.—

“(1) In general.—Any qualified royalty received or accrued in taxable years beginning after December 31, 1981, by a qualified taxpayer shall be treated in the same manner as a royalty with respect to software is treated under the amendments made by this section [amending this section and section
553 of this title].

“(2) Qualified taxpayer.—For purposes of this subsection, a qualified taxpayer is any taxpayer incorporated on September 7, 1978, which is engaged in the trade or business of manufacturing dolls and accessories.

“(3) Qualified royalty.—For purposes of this subsection, the term ‘qualified royalty’ means any royalty arising from an agreement entered into in 1982 which permits the licensee to manufacture and sell dolls and accessories.

“(d) Special Rule for Treatment of Active Business Computer Royalties for S Corporation Purposes.—In the case of a taxpayer which was incorporated on May 3, 1977, in California and which elected to be taxed as an S corporation for its taxable year ending on December 31, 1985, any active business computer royalties (within the meaning of section 543(d) of the Internal Revenue Code of 1986 as added by this Act) which are received by the taxpayer in taxable years beginning after December 31, 1984, shall not be treated as passive investment income (within the meaning of section
1362(d)(3)(D) [now section
1362(d)(3)(C)]) for purposes of subchapter S of chapter 1 of such Code.”

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and
1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 ofPub. L. 99–514, as amended, set out as a note under section
401 of this title.

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